Cushman & Wakefield’s healthcare capital markets update for the first half of 2024 is focusing heavily on medical outpatient buildings. The short take: volume and pricing have remained muted, but there was continued resiliency in the category.
Medical outpatient buildings, not to be confused with medical office buildings — both being called MOBs, though this report is about the first type — have become important to the overall healthcare industry. Evolving demographics, changing reimbursement policies, and technology make the decentralization of care delivery desirable and necessary.
There had been a sharp increase in the volume and pricing of medical outpatient buildings between 2020 and 2022, but that has fallen due to inflation, rising interest rates, and a lack of liquidity as many sources wait for someone else to take the risk of the plunge. And yet, the asset class has remained “resilient,” according to the CRE firm.
Factor out merger and acquisition activity among REITs and quarterly volumes have largely kept below $2 billion. However, portfolio transactions have increased from 32% of activity in 2023 to 61% of the first half of 2024 transactions.
Both buyers and sellers have continued to wait for favorable conditions to act. Purchasers want a chance to profit on distressed properties and sellers looking to avoid mark-to-market losses.
Median cap rates for MOBs fell as low as 5.6% in the third quarter of 2022. As of the second quarter of 2024, cap rates are at 6.9%, although cap rate expansion has slowed. Market sentiment has started to shift as the promise of interest rate cuts and “compression of long-dated bond yields” suggest the potential for a market bottom to arrive.
In 2022 Q3, the average price per square foot was $397. Now it’s $345 per square foot, a drop of $52 per square foot. It’s a shift from core or core plus to largely volume-add.
The difference between average cap rates for portfolios and single-asset transactions was 100 basis points in Q4 2021. In 3Q 2023, portfolio caps were 30 basis points higher than single assets. In the first half of this year, compression is down to 10 basis points.
There’s also been an increase in portfolio transactions “following a prolonged period of deferred portfolio sales,” according to Cushman. If interest rates start to drop and debt markets, there would likely be an increase in portfolio purchase premiums.